IMPACT INVESTING: An Overview
What is Impact Investing?
Impact investing has emerged as a form of socially responsible investing to address complex social and environmental issues and achieve positive social change. As defined by the Global Impact Investing Network (GIIN): “Impact investments are investments made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below-market to above-market rates, depending upon the circumstances.” Impact investors deploy their capital in for-profit businesses, nonprofits, and funds, through various asset classes, such as individual investments, private equity funds, venture capital, debt, loan guarantees, lines of credit, and bonds. Impact investing has targeted many sectors such as education, healthcare, climate control, nutrition, agriculture, and countless others. A recent CGAP brief noted that while impact investors are share motivations, they fall into two categories: “impact first” seeking social or environmental impact yet willing to accept below market rate of returns; and “finance first” who aim to get above market rate returns while also generating social or environmental impact.
Impact Investing’s Intersection with Microfinance
Microfinance has, for many years, provided banking services to low-income people to enable them to become self-sufficient through access to borrowing money, saving money, and insurance. As a primary mechanism for alleviating poverty in developing countries, microfinance institutions have empowered entrepreneurship globally; while also making inroads in ‘developed’ countries such as the US (e.g. Grameen America) and Ireland. Impact investing provides a broader range of support and business building beyond banking services.
While social investing, social enterprises, social entrepreneurs and a whole world of community development finance, in particular, microfinance, had existed for decades, the term “impact investing” emerged in 2007 when the Rockefeller Foundation convened a meeting to provide grants and investments to core partners, launching much of the network of organizations and activities that now define impact investing. As microfinance has become more mainstream, due in part to such online platforms as Kiva (that enable individuals to ‘invest’ US $25 in loans to emerging entrepreneurs worldwide), the intersection between microfinance and impact investing has become more aligned through shared social motivations.
The Players and their Commitments
Foundations, governments, the private sector, and investment funds are implementing an increasing number of innovative approaches to financing social change. On September 24, 2014, the U.S. Small Business Administration made a $1 billion commitment to “support individual impact investing funds [and] assist in building the growing and dynamic impact investing sector.” After providing billions of dollars of impact investing through the Bill and Melinda Gates Foundation, Bill Gates recently pledged substantial personal support for Unitus Seed Fund, an Indian impact fund founded in 2012 that supports start-ups in areas like healthcare, education, energy and farming. Leapfrog Investments has funded numerous entrepreneurial ventures, including Bima, a mobile insurance platform that offers products such as life, accident and health insurance for as little as $0.20 to $6.00 a month to customers in Asia and Africa. Yet another investment vehicle, and variant on the same theme, is Media Development Investment Fund, a mission-driven investment fund providing low-cost financing to independent news media in countries with a history of media oppression. With investments in over 90 media companies in more than 30 countries since its launch in 1995, MDIF has provided more than $125 million in financing – including over $110 million in debt and equity investments.
The foundation community also has not missed the boat. Many foundations now provide Program Related Investments (PRI’s), a hybrid between grants and equity financing, to social enterprises.
Even Wall Street firms have become involved in social impact investing. A number of firms, such as Goldman Sachs and Bank of America’s Merrill Lynch unit, are involved with social impact bonds that address a specific need, like reducing recidivism at a state prison, while bringing returns for investors. A Social Impact Bond, originally conceived in the UK as a Pay for Success Bond, is a contract between government and one or more non-government entities that shifts responsibility for a social service program from government to the private entity(ies) in hopes of achieving better results and reduced taxpayer expense. Under the contract, private investors, working with the non-government entity, finance, manage and ensure delivery of a government service. And BlackRock, a major investment management firm with $4.65 trillion under management, announced on February 8, 2015, the launch of a major impact investments initiative to help their clients do more scalable impact investing to address a range of social and environmental issues. The impetus and momentum are clearly moving forward.
Individual impact investors historically have been wealthy investors, either as single angel investors or through groups such as the Investors’ Circle in the US and Clearly Social Angels in the UK. However, opportunities for impact investing are becoming increasingly available to the general public. For example, the Calvert Foundation and most recently, TriLinc Global a new institutional fund manager, are providing investment opportunities in social enterprises to small investors. There are even now web-based investment vehicles such as SliceBiz, a micro-investment crowdfunding platform started last year that provides seed funding for startups in Africa.
Accountability and Standards
Financial performance measurements have always been key to business development. With the initial support of the Rockefeller Foundation, rigorous efforts to measure social and environmental performance, as well, have been considered critical to impact investing. Several of these initiatives include: IRIS, managed by the GIIN, is the catalog of open-source performance metrics that many impact investors use to measure social and environmental impact. The Global Impact Investing Rating System (GIIRS) is a comprehensive and transparent system for assessing the social and environmental impact of developed and emerging market companies and funds with a ratings and analytics approach analogous to Morningstar investment rankings and Capital IQ financial analytics. The National Community Investment Fund uses Social Performance Metrics as a transparent way to evaluate a bank’s impact in economically distressed communities, using both quantitative and qualitative measurement. Toniic, a global network of action-oriented impact investors publishes an E-Guide to Impact Measurement, which shares practices of Toniic members around impact measurements and providing recommendations for assessing impact for seed-stage investments.
A Global Reach
Impact investing seems to be coming of age around the world. A 2014 report from J.P. Morgan, based on surveys by the GIIN, noted that 80% of respondents indicated that generating financial returns is essential, and 71% indicated that determining impact objectives is essential. It is estimated that impact investments currently total $46 billion, with $10.6 billion invested in 2013 and expected to grow to $12.7 billion in 2014. At the end of the day, what actually constitutes impacting investing? It is about intent and purpose to deliver solutions to global societal challenges. Doing good and making money seem not to be incompatible. By: Suzanne Salomon, Development Consultant